A sluggish offshore drilling market could deteriorate further next year due to weak demand and a flood of new vessels, even though a few places such as Mexico and Brazil remain promising for exploration.

OSLO, Sept 10 (Reuters) - A sluggish offshore drilling market could deteriorate further next year due to weak demand and a flood of new vessels, even though a few places such as Mexico and Brazil remain promising for exploration, industry executives said on Wednesday.

Rig rates have fallen sharply over the past 18 months as oil companies cut capital spending, saving cash for dividends, just as dozens of brand new offshore rigs ordered during the boom times hit the seas, creating overcapacity.

"The market is going to be bad this year, it is going to be worse next year, then it will be stabilising," Rune Magnus Lundetrae, chief financial officer (CFO) of Seadrill, the world's biggest driller by market capitalisation, said on the sidelines of an industry conference.

Day rates for the most advanced ultra-deepwater rigs peaked around $650,000 last year and are now down in a range of $375,000-$500,000, though contracting activity by oil firms has slowed to a trickle, making it hard to establish the actual market rate, executives said.

"It is going to be a very challenging market place for the next 12-18 months," Transocean CFO Esa Ikäheimonen told Reuters. "People will retire some of the older assets and typically deepwater and midwater assets will be going."

"You will probably see day rates lower than what I indicated in the ($375,000-$500,000 per day) range," Ikäheimonen added. "But you might see day rates that are higher ... To me that is the average level where I think the deals will be done."

Orders for new ultra-deepwater rigs equal around 50 percent of the existing fleet and analysts estimate around a third of the new vessels that will come during the next three to four years still have no drilling contracts.

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